Main Street and Wall Street

Front matter

BY

WILLIAM Z. RIPLEY

Nathaniel Ropes Professor of Political Economy Harvard University

Contents

PAGE

Personal Note . v

I Before the War: How Things Looked Then.

II Corporate Vehicles Post-war Engines Of Finance

The United States is not infrequently pictured to the world at large by travelers from abroad as a land of milk and honey, of material well-being where plumbing, radio sets, and Ford cars abound. Our achievements in the field of music, poetry, and philosophy are acknowledged; but there is not a due appreciation of the fact that our output in another domain of the imagination leads all the world. Chief Justice Marshall in the Dartmouth College case conceives of a corporation as “an artificial being, invisible, intangible, and existing only in contem¬ plation of law.” We turn out more of this particular transcendental product than all the rest of the universe put together. Our supremacy in the matter of wheat, hogs, cotton, and automobiles is matter of common knowledge; but the degree to which we have outstripped all creation in this particular line of politico-legal activity has not been adequately advertised.

Our annual crop of corporate charters — articles of association is another name for them — is not only the most bountiful of its kind on earth; the yield is a constantly accelerating one. This is due to the fact that there are forty-eight different sovereign commonwealths perpetrating these instruments, severally and independ¬ ently, in America; whereas in the nations of Europe, even in the major industrial countries, there is but one such fountainhead. It is also true that the number of incorporations in some of these single states with us — not necessarily the larger or more important ones — exceeds that of such great industrial countries as the United Kingdom, France, of Germany. Thus does this forthputting of American corporations multiply itself geometrically. A few figures will fortify these bald assertions. In the British Isles they are quite particular about the matter of registration of companies. In 1920, there were 79,541 such corporations enrolled with the Board of Trade. Our own little state of Delaware, all alone, prides itself upon a corporate progeny, all living, of approximately 70,000 members. During the year 1920 there were 11,011 new companies registered and 2541 stricken from the rolls in the United Kingdom, yielding a net increase of 8470 companies. Our own state of New York in the calendar year 1925 issued charters to 24,703 stock corporations — not including banks, in¬ surance companies, and other non-business concerns. New Jersey, always active in this business, issued 5400 certificates of incorporation. Ohio and Illinois are typical of a group of states which sets on foot approximately 5000 companies a year apiece; and the tiny common¬ wealth of Delaware in 1925 was blessed with the addition of 5053 companies to its little family. None seem to have died. Massachusetts and Pennsylvania of late have averaged about 2000 new charters annually. States like Wisconsin produce in the neighborhood of 1500. West Virginia averages about 100 corporations per month. Even North Dakota, which we deem an agricultural bailiwick, contributed a modest quota of 206 during the year 1925. South Dakota did twice as well, with 398 new charters. Quite a few states view the matter so lightly that no figures whatsoever are available. Nevada printed a list for 1923 covering forty-one pages of type, indicating an output of about 900 charters. But Con¬ necticut, through its secretary, advises us that it makes no tabulation of the matter, nor is it possible to furnish any statistics on the subject. It would be a long task to ascertain by count from our forty-eight secretaries of state just what the total annual output is. But one might upon this showing venture the guess that the number would be not less than 100,000 — roughly ten times the annual authorization of limited companies in the United Kingdom.

It is not only the present total of incorporations in the United States which is surprising; the rate of accelera¬ tion of this movement is equally disconcerting. Take New York, for instance, launching 24,703 new corpo¬ rations in 1925. In 1900 the total was only about one tenth of this number; it reached the figure of 10,000 annually in 1915, and of 15,000 annually about 1920. The last jump of 5000 took place in the twelvemonth just elapsed. Ohio has never been conspicuous in this particular line of business. It used to incorporate over 1000 concerns a year as far back as 1890. The annual product today is fivefold that figure. Massachusetts, an old industrial community, was launching from 200 to 500 corporations, annually, twenty-five years ago. The total for 1925 was almost five times as many. Bumper crops always occur, of course, in times of prosperity. The tide of incorporation rises and falls along with bank clearings, railroad tonnage, and the marriage rate. But there also is an interesting ebb and flow discernible in this current, arising, as will shortly appear, from the keen competition between the different commonwealths for pelf and prestige. New Jersey during the nineties and for a bit thereafter was so uniquely gracious in according permission to its corporate offspring to hold stock in other companies that it easily led the procession of the states. Now it has yielded place as to leadership to several others. Maine, by reason of its scandalous laxity, had its heyday during the orgy of corporation promotion about 1900. Today, owing to keen inter¬ state competition, it is enabled to charter only about one third as many new companies annually as before. Massachusetts was forced into the race in 1903. New York took a spurt ahead about 1912 through the in¬ vention of the no-par stock device, and seems to have been able, thanks perhaps to its size and industrial pre¬ eminence, to have been able to maintain the leadership ever since. So it comes and goes. But the stream grows ever wider and deeper in its total flow. To its magni¬ tude there seems to be no limit.

The fact is that the corporation in America is entirely supplanting such other forms of business organization as individual ownership or partnership. What used to be an exceptional device, confined to large enterprises, has now become the rule for all businesses, great and small. This increasing resort to the corporate device is demon¬ strated by the following table: —

Percentage of industrial wage earners under corporate organization

1904 70.6

1909 75 -6

1919 86.5

Percentage value of all manufactured articles under corporate organization

83-3

87.7

This table gives the percentages at our various manu¬ facturing censuses of wage earners and of production under the corporate form of organization. It clearly portrays the rapid rise of the device. The individual concern and the partnership are rapidly approaching the vanishing point. The total number of such hold-overs will of course always be considerable, but the convincing thing is the relative insignificance of these other forms of organization taken in the aggregate. In a rough estimate of 100,000 new incorporations in 1925, it is probable that nine tenths or more are for little concerns capitalized at less than $100,000 each. It is entirely characteristic of American conditions as a whole that the corporation should be steadily invading every branch of business down even to establishments of the small¬ est size; whereas in Europe to a much larger degree the limited company is still confined to enterprises of more than average magnitude.

The prevalence of the corporation in America is all the more significant in view of its history. In the British Isles, to be sure, the unpleasant experience of the people with their sovereigns had some effect for a time. Price, in his book The English Patents of Monopoly , char¬ acterizes the early promotion of corporations in Eng¬ land as “simply one of many shifty devices for raising money independent of parliamentary supplies.” All down through the period from the accession of Elizabeth to the Civil War there was a succession of attempts to grant monopoly privileges for the conduct of various enterprises, always of course for cash. Now it was the starch makers of London, or again the manufacturers of playing cards, or it might be the silk weavers or the pin makers; all of them purchased their right to be and to do, for a price, with the express design of recovering the full amount with interest from the people at large. The protracted struggle for supremacy during the sixteenth and seventeenth centuries between Crown and Parlia¬ ment could not but make an impression upon the atti¬ tude of the people toward this particular engine of finance and management. 7

By way of contrast, historically, the corporation got into ill repute in the United States for quite another reason. It seems to have been very infrequent in the early days. Out of twenty-one business corporations within the United States before the adoption of the Con¬ stitution, only two were trading companies and one was a manufacturing concern. And for long thereafter this was not the normal form of organization except for a few businesses like banking, insurance, turnpikes, and bridges. Such corporations as were seemingly inherited from the old country were of the fraudulent sort, which were conducted not individually but as joint stock com¬ panies. A large proportion of the two hundred such concerns about 1720 were more or less off color, including, for example, those two mentioned by Williston, one a company to provide for “insurance and improvement of children’s fortunes,” and another for “making salt water fresh.” Such exceptional forms of organization served as a screen behind which individuals might work their will, as in the field of mining, lotteries, and the like. New Jersey in 1791 issued a charter to the New Jersey Manu¬ facturing Company, permitting it among other things to raise $ 10,000 by lottery each year in general aid of its other manufacturing business.

Coming on down into the nineteenth century one still discerns a strong flavor of public disapproval of the cor¬ poration as applied to private business, indicating that it was still an exceptional and to a considerable extent a distrusted business device. The first American work on political economy, published in 1820, has this to say upon the subject: —

Every moneyed corporation is prima facie injurious to the national wealth, and ought to be looked upon by those who have no money with jealousy and suspicion. They are, and ought to be, considered as artificial engines of power, contrived by the rich for the purpose of increasing their already too great ascendancy and calculated to destroy that natural equality among men which no government ought to lend its power in destroying. The tendency of such institutions is to cause a more unequal division of property and a greater inequality among men than would otherwise take place.

Twenty years later the governor of Massachusetts, within which commonwealth most of the existing corpora¬ tions were then doing business, sent a stirring message to the Great and General Court, paying his respects to the corporation as follows : —

These societies are one of the vices of our time. They en¬ courage speculation and fraud, mobilize landed property, over¬ turn matrimonial arrangements, escape publicity in the transfer of real property, diminish the sense of individual responsi¬ bility, create property in mortmain, prevent all penal reme¬ dies, are lacking in moral sense, and constitute finally a grave social peril by concentrating too much power in the hands of certain of our citizens.

This was the time, it will be recalled, of the creation of corporations, not under general law, but by special act of the legislature. The records show that a large proportion of the companies formed in this particular commonwealth during fifteen years preceding the Civil War were driven out of business by the courts. Of upward of 6000 new corporations created within five years, over 4000 had to be dissolved — “mere fugitive organizations based upon credulity and to be plucked in transit, as Chandler in his Express Trusts puts it. For the neighboring state of New York thirty out of the forty- two companies chartered down to 1853 turned out to be frauds. It is stated that within a period of ten years five sixths of them came to a bad end. No wonder that some of the states adopted the expedient contained in a Pennsylvania charter of 1866 for the New York California Vineyard Company. Under the terms of this instrument the corporation was empowered to do business anywhere “except in Pennsylvania,” the land of its birth. Poor waifs indeed many of them were, thus laid upon the public doorstep, abandoned even by their governmental progenitors.

All this time, of course, there were a few sound corpo¬ rations conducting business enterprises in the field of private industry. In such branches as cotton manufac¬ ture, for instance, soon after the industrial revolution it was necessary to assemble more capital than could customarily be provided by individuals or families. Yet even for these companies the capital stocks were usually owned by those who managed the enterprise. They were largely family concerns. Shares were but rarely bought and sold. Only six of them, and those the largest of the cotton mills, were dealt in publicly on the Boston Stock Exchange in 1830, although this number increased substantially within the succeeding generation. But it was not until the quarter century after 1-860 that the practice of incorporation became sufficiently common to call for general laws upon the subject. Up to this time each corporation had been validated by a special charter, secured, perhaps, in too many cases through the liberal expenditure of money. But little by little the foundation was laid for the condition now confronting us — that of the corporation as the almost universally accepted form of legal organization for the conduct of business enterprises of every size, shape, and hue.

A second outstanding peculiarity of the American situation is a product of the twofold nature of our govern¬ mental system. This it is, indeed, which with all its merits and advantages unquestionably casts a blight not only upon our corporations but upon a wide range of other economic and social activities. The province of the Federal Government being restricted mainly to ex¬ ternal relations and to matters of interstate commerce, there remains to each of the forty-eight states a complete sovereignty in all of the other relations of life. Under early simple conditions, with both transportation and communication between the states difficult and expensive, it was imperative that each commonwealth should be more or less a law unto itself in most matters of daily living. The colonial period and the earlier years under the Federal Government were characterized by sharp conflicts over the retention of these local powers. Li¬ censes and taxes were sought to be continued by domestic concerns against “foreigners” over the border. An odd instance of persistence of this provincial spirit is afforded by the laws of Rhode Island concerning imprisonment for debt — a survival of the Middle Ages. But how else can a tiny jurisdiction protect its merchants in this age of buying on the installment plan? Escape over the frontier is so very easy, bearing your part-paid parlor furniture or your radio set beyond the sheriff’s reach. Little by little with improvement of highways, railroads, the telegraph and telephone, geographic barriers have broken down, until the United States as a whole has become, practically speaking, one great market. And, of course, along with the extension of markets has come a lessening of the barriers which set off the people of one state socially from their neighbors. So far has this progressed that it is the observation of European travelers in the United States that we are more nearly homo¬ geneous in customs, manners, and ways of doing business over a vast area than are the little compact countries of Europe. For they are set off against one another not only by mountains and rivers, but also by reason of their differing political traditions, languages, and religions. From a social point of view our danger is that of too monotonous uniformity rather than of a jarring diversity in customs, manners, and mode of thought.

Nevertheless, problems of great moment have arisen in the United States because of the divergent and con¬ flicting laws respecting all sorts of things among the forty-eight commonwealths. The need of uniformity has already brought about federal systems of banking, in matters of bankruptcy and similar concerns. Perhaps the three most pressing problems other than that of corporate legislation have to do with public finance, family law, and labor legislation — child labor in par¬ ticular. In the field of public finance all sorts of con¬ flicts in matters of taxation or of exemption therefrom arise. Certain states derive profit from constituting themselves — Florida, for example — an asylum against the imposition of income taxes during life -or of inherit¬ ance taxes at death. Safety vaults may spring up apace and old people migrate in numbers to those places favored alike by Nature climatically and by man in respect of his exercise of the taxing power. In the domain of family relations, conflicting state legislation has also brought forth a multitude of inconveniences and of abuses. Massachusetts, maintaining a high standard for its mar¬ riage laws, found itself exposed to attack on the one side from Rhode Island and on the other from Vermont (at least until 1917), due to the laxity of the statutes in these two neighboring commonwealths. Brevity of residence, informality of registration or prior notice, laxity of pa¬ rental control, in the little state of Vermont for many years made Bellows Falls a veritable Gretna Green for intending brides and grooms from Massachusetts.

The Honeymoon Special train on the Boston and Maine Railroad got you there about noon, got you married, and safe home again, all in a jiffy. The commondaw wedlock by handfasting, in New York, just over the western border, also attracted matrimonial candidates from Massachusetts, deterred by the formality of the statutes at home. Just now, because Delaware requires an interval of twenty-four hours after license, before mar¬ riage may take place, while in Maryland the wedding may occur at once, the marriage rate in Maryland is three times as high as it is over the border. Brooke County, the panhandle of West Virginia, is so inviting connubially because of its laws, that most of its weddings take place between citizens of Ohio or of Pennsylvania. Nebraska in 1922 amended its statutes, to require posting of a ten-day advance notice before issue of the license. As a result the state marriage rate dropped within two years from 9.4 to only 3.1 per thousand. People simply sought and found their marital estate elsewhere. Or, had mar¬ riage been effected, how different were the requirements as respects divorce. South Carolina, at one extreme, per¬ mitted no annulment for any cause whatsoever. Other states, from Rhode Island to Nevada, permitted divorce for almost any cause, up to a change in the direction of the wind or temperature. It has long been and still is futile to expect any substantial abatement of the divorce evil until a greater uniformity of state legislation in these matrimonial concerns may be brought about.

Precisely similar as respects inconvenience, friction, and abuse are the conditions among the states in the domain of labor legislation. The same corporation may own mills operating for a ten-hour day or longer, with women, young persons, and children of all ages working day and night, in the Southern states, and other mills situated in Massachusetts, constrained to operate only forty-eight hours a week, employing no persons under the age of fourteen years, with the prohibition of all labor of females or children at night. Even now there is a shocking con¬ trariety of conditions as between Massachusetts and Rhode Island. One state accords the benefit of work¬ men’s compensation laws in cases of industrial accident; its neighbors may either be in the stage of employers’ liability legislation or in a mediaeval condition char¬ acterized by no legislation at all. And, to cap the climax in this regard, we have the Federal Government, with a code quite its own, functioning over, in, and through all of these forty-eight states. The conflict of laws seems to reach a climax in this particular province of labor legislation. A railway employee may be alternating all day long at five- or ten-minute intervals between jurisdiction of the United States or of an individual state as respects compensation for accidents, hours of serv¬ ice, or discipline. During those intervals when he is concerned with interstate business, he is subject to the laws of the United States. All the rest of the time he is merely a private citizen of an individual commonwealth.

Or take the longshoreman, engaged in one of the most dangerous callings known. The number of accidents in the loading and unloading of ships is appalling. These men, too, all day long are passing and repassing from state territory on the pier over to the jurisdiction of the Federal Government, in the maritime zone in which the vessel floats. If one happens to fall, to be struck, burned, or maimed on one side of an imaginary line, halfway up the gangplank, he is subject to one code of laws; but on the other side of that line his rights and liabilities are defined by those of an entirely different sort. Wherever one touches it, in all of these different human contacts one runs afoul of the complications arising from our dual American system of government.

The root of much of our trouble in maintaining decent standards of corporate practice arises, too, from the same multiplicity and overlapping of jurisdictions, exemplified in these other matters of daily living. The scandalous prostitution of the sovereign power of states, whether for purposes of public revenue or merely as utilized by de¬ signing men for personal enrichment, may be illustrated by a few typical advertisements. Collier's Weekly , March 7, 1908, prints this one: —

Incorporate in Arizona, costs less than elsewhere, advantages are worth thousands. Transact business anywhere. No tax in Arizona. No stock subscriptions required before incorporat¬ ing. Any kind of stock may be issued and paid up in property, leases, or anything of value, and made nonassessable. No pub¬ lic statement and no books need be kept for public inspection anywhere. Stockholders exempt from liability if our form is used. The great incorporating business of Arizona was built up by President Stoddard while Secretary of Arizona. Resi¬ dent agent for many thousand companies. All blanks, laws, by-laws, and particulars free. Companies incorporated same day we receive reasonable deposit on account and telegram stating name, capital, number of shares and names of first Directors. Incorporation better than partnership. Send for our latest revised pamphlet and learn the many and great ad¬ vantages of having your business incorporated. Reference: Any bank in Arizona. Stoddard Incorporating Company, Box 3-7, Phoenix, Arizona.

That the business was still profitable thirteen years later appears from the following clipping from the Sci¬ entific American: —

Incorporate in Arizona

Complete in one day. Any capitalization, least cost, greatest advantages. Transact business anywhere. Laws, by-laws, and forms free.

Stoddard Incorporating Co.

Phoenix, Arizona.

Here is another from a Boston paper: —

This heats New Jersey

Charters procured under South Dakota laws for a few dollars. Write for corporation laws, blanks, by-laws, and forms to Philip Laurence, late Asst. Sec. of State, Huron, Beadle Co., So. Dakota.

This, too, from a recent number of System: —

Charters — Delaware Best , Quickest, Cheapest , most liberal. Nothing need be paid in. Do business and hold meetings any¬ where. Free forms. Colonial Charter Company, Wilmington, Del.

One finds in the legal press, “The Corporation Laws of the State of Nevada offer the greatest inducements.” Some years ago the secretary of state of South Dakota officially recommended the services of the South Dakota Corporation Charter Company. The president of this concern writes, “In nineteen cases out of twenty we are able to get the charter into the mails within ten hours after the application is received here.”

The little state of Delaware has always been forward in this . chartermongering business. The charges for service by the Delaware Registration Trust Company of Wilmington “for maintaining the principal office, acting as registered agent, exposing the sign, acting as custodian of the duplicate stock ledger, giving notice of stock¬ holders’ meetings, furnishing annual report blanks,” and so forth, are $50 per year if the capital does not exceed $ 1,000,000; for upward of $1,000,000, $100 per year. “We can complete all details here within twenty-four hours of the receipt of the papers properly executed, remittance, etc.” “To facilitate the business, save time and, if desired, to prevent publicity in obtaining your charter we will furnish the three incorporators from this office, who will attend to the filing of the original certifi¬ cate of incorporation , the recording of the certified copy, and will then meet in our office and hold the first meeting of incorporators and elect or select directors who may meet in your city, elect officers, and proceed with the business of your company.” In the Daily Times-Star for October 20, 1926, is this inviting bit: “Simple annual reports are necessary, but they do not require disclosure of the corporation s financial affairs [our italics]. Of all the company’s books and records, only an original or dupli¬ cate stock ledger must be kept in Delaware.” Such are the conditions under which may be launched upon a perpetual career, not alone in Delaware but in a con¬ siderable number of our other American commonwealths, legal creations which may, among other things, commit the following acts: Hold all of the meetings of its stock¬ holders and directors anywhere under the sun; keep

3 1 all of its original records and accounts at its principal office anywhere; issue all the bonds it desires without further authorization from the chartering state and even without tax thereon; put forth without limit capital stock for practically any sort of consideration, cash, no cash, property, real or imaginary, or services, actual or spurious; and all of this coupled with the privilege of non-liability on the part of the shareholders for any of the debts contracted by the corporation.

Standard American practice is further illustrated by what may be done in Maine. The Corporation Trust Company “maintains fully equipped offices for the organi¬ zation and representation of business corporations in all the states.” At Portland, conveniently situated opposite the Union Station, is a corporate hostelry, fully adequate to maintain the reputation of the state as a popular summer resort. According to the law, shareholders’ meetings must be held and records must be kept at the “principal office” of the corporation within the common¬ wealth. There is just a trace of humor in the further clauses of the Corporation Trust Company’s advertise¬ ment: “It has spacious rooms for holding stockholders’ meetings. Its facilities are adequate for handling meet¬ ings at which large numbers of proxies are presented.”

A disgraceful misuse of the sovereign power of an American commonwealth, amounting in fact to a con¬ spiracy against the citizens of foreign states, was brought to my attention some years ago in conneotion with the affairs of the Brazil Railway Company. ' This corporation was chartered in the state of Maine in 1906; and there¬ upon embarked upon an extensive program of railroad construction and general promotion in Brazil, Uruguay, and Bolivia. Its magnitude is indicated by the capital shares, issued to the amount of $40,000,000, afterward raised to $60,000,000. Within six years its borrowings, over and above this, amounted to about $75,000,000. The most extraordinary thing about it was the charter. This instrument permitted the management, without ap¬ proval of the shareholders, to dispose of the assets at any price; to purchase whatever property it might see fit, at any figure; to contract loans without let or hin¬ drance; and to issue new securities also ad lib. Eightyfive different issues were finally placed in the various capital centres of Europe. The charter solemnly pro¬ vided that the meetings of the shareholders should be held at the principal office in Maine. With equal solem¬ nity, it proceeded to require that notices of these meetings must be given at the principal office in Maine, at least ten days in advance. And, just to make assurance doubly sure, it was further provided that unless the proxies were returned three days before the stated meeting, the treas¬ urer should be authorized to cast the vote under the direction of the president of the corporation. That allowed exactly seven days for the notices of the meeting to reach the shareholders, all of whom were in Europe, and to return the proxies in time for their effective use. Was ever a fraud more patent upon the face of it? Little wonder that the whole affair resulted in a colossal smash — a tangle requiring the expert services of Mr. Cameron Forbes, late governor of the Philippine Islands, who was appointed receiver in 19 14. At that time it was estimated that $12,000,000 of new money would be requisite for purposes of rehabilitation. The losses in this stupendous venture have, so far as I know, never even been estimated. As for the situation in general, the denunciation of Governor Fernald of Maine, in 1909, of the continued practice of receipt of large revenues from incorporation as “the price of prostitution” of the sovereign power of the commonwealth, is by no means exaggerated. Federal Judge Landis in a similar case summed up the matter not inaptly, when sentencing a broker to ten years’ imprisonment for fraudulent pro¬ motion, “The state of Delaware would face indictment for licensing such corporations as the Pan Motor Company if I could summon a sovereign state into court.”